Why Corporate Governance Matters (Part 1)

The recent happenings in the banking sector of Ghana brings to the fore the importance of corporate governance. The takeover of Capital bank, UT bank, and Unibank, the distressed nature of some other banks and financial institutions are all a reflection of governance failures.

The Cadbury Report defines Corporate governance as a system by which companies are directed and controlled whiles the OECD Principles describes it as a set of relationships between a company’s management, its board, its shareholders and other stakeholders. In general, it refers to the roles of persons entrusted with the supervision, control and direction of an entity.

The World has seen corporate governance failures that have resulted in cases like the Enron corporate fraud, the Asian financial crisis, the Lehmann collapse, and the financial crisis of 2008 among many others.

Nigeria had its own banking crisis in 2009 which made the Central Bank of Nigeria (CBN) step up its supervisory and monitoring role to clean up the mess and strengthen the banking sector. The Bank of Ghana (BoG) has equally responded proactively to the recent scare that hit the banking sector in Ghana.

The purpose of corporate governance is to build and strengthen accountability, transparency, credibility, integrity and trust. These form the pillars of good corporate governance. Effective governance leads to effective performance for banks.

Governance structures are erected to ensure a strong and reliable banking industry where there is safety of depositors money and the required flexibility to support the economic development of the country.

Good corporate governance creates the atmosphere where banks will comply with the laid down rules and regulations without compromise, to ensure proper risk management, strong internal control, and to prevent bank distress.

To make this practical, certain basic issues need to be considered when constituting the board. The board is the key driver of good governance in four critical areas of Leadership, Stewardship, Monitoring, and Reporting.

The board size and composition, making sure there is diversity of expertise and knowledge represented, and the processes including meetings and board materials, decision making, board committees, board evaluation, and directors compensation etc must be addressed.

If you pad the membership with favorites without the requisite expertise and lack independent outside directors, you are heading towards danger.

It means there will be lack of robust debates and decision making may lack transparency. The board does not exist to rubber stamp management decisions.

Analysis of corporate governance failures and investigations into governance scandals provide evidence that most failures derive from some or all of the following: lack of separation of ownership and control, deliberate accounting fraud, weak board oversight, failure of internal controls, failure of external auditors to uncover rot, weak regulatory environment, and high level of corruption.

Sometimes, cultural factors like deference to age, and a distaste for lively and exuberant debate at board meetings account for certain practices that needed to be flagged to pass through eventually harming the business.

Boards of banks have to increasingly deal with risk governance and management, cost management – cost – income ratio, business development and growth while coping with increased compliance requirements, executive compensation and CEO succession planning, attracting the right independent outside directors, stakeholder engagement and the societal impact of their business.

The directors face major dilemmas, in that, they must be entrepreneurial and drive the business forward and yet keep it under prudent control. They must know the bank well and answer for its actions and at the same time be able to take a step back and retain an objective view.

They must be sensitive to short term profitability and be on top of long term trends and must be focused on the bottom line for shareholders but act responsibly towards employees, customers and myriad of stakeholders.

When you have a competent and engaging board in place willing to engage with management on compliance and performance, many of the corporate governance pitfalls that threaten many banks and financial institutions can be averted. Part 2 of this article will deal with directors competency sets.